Sunday, 29 November 2015

There's a remarkable piece in today's Sunday Times in which Kevin Pringle (the SNP's erstwhile spin-doctor-in-chief) admonishes us silly Scots who keep casting our eyes back, those of us who ponder the fact that we dodged a bullet by voting No in last year's Independence Referendum. He asserts simply:

pointing to glaring inconsistencies between what was said before the referendum would be the case, and what has actually happened afterwards [is] pointless and irrelevant

You've got to admire the chutzpah of a man who can write that statement. It's obvious to even the most casual observer why a cheerleader for the SNP would rather we didn't look back at the case they presented; the SNP will be seeking our vote in May 2016, so of course they'd like us to think it "pointless and irrelevant" that they tried to persuade us to vote Yes on the basis of a false prospectus.

But he doesn't leave it there. He may no longer be employed by the SNP but old habits die hard and a spin-doctor's gotta spin. So - having asserted we shouldn't - he proceeds to cast his eyes back to try and score some rather weak points around risks to HMRC jobs and orders for type-26 frigates. There's an obvious "have your cake and eat it" hypocrisy to this rhetorical ploy and both of these are far more nuanced issues than he suggests - but I don't want to get bogged down in those arguments here. I want to focus instead on the following astonishing statement:

On the back of the plummeting price of oil, Unionist parties revel in the fact that North Sea revenues are only going to be £0.1 billion next year, compared to the £6.8-7.9 billion forecast in the independence white paper.

Of course, it should be pointed out that while the Scottish government’s central assumption was for the oil price to be $110 a barrel at the time of independence, Westminster’s department of energy and climate change predicted prices of $114-127 a barrel over the same period. And the Treasury publishes a monthly summary of figures produced by independent organisations - in May 2014 none of the 22 forecasters expected oil prices to fall to current levels, and 18 expected prices to remain above $100 a barrel in 2015.

Let's put aside the childish suggestion that Unionist parties "revel" in the drop in North Sea revenues and focus on what he's doing here. The first paragraph refers to North Sea revenues, the second talks only of the oil price. He's relying on the fact that the casual reader will accept this elision, will allow North Sea revenue forecasts and oil price forecasts to be conflated into being effectively the same thing. Well they're not, as we'll come on to see.

We need to get one basic point clear first though: the UK Government relies on OBR forecasts and has done since it was established in 2010. The OBR - the Office for Budget Responsibility - the clue is in the name. If you want to budget responsibly you can't simply ignore it. Needless to say the Scottish Government's Independence White Paper did just that - it ignored the OBR's forecasts for North Sea revenues (whilst relying on them for the base case onshore assumptions)1.

Now if you read the second paragraph of that Pringle quote quickly you might have gained the impression that the White Paper was using the same assumptions as the UK Government. What he's actually asserting is that the White Paper oil price assumption of $110 a barrel was at the low end of the DECC assumptions that existed at the time. This is correct - I pointed out as much myself a year ago in "Oil & Gas: When Will We Ever Learn" - but it's not the same price assumption as the OBR were using. In March 2013 (fully 8 months before the White Paper was published) the OBR was assuming $97 for 2016-17 (revised to $97.4 in the OBR's Dec 2013 forecast)

But there'a bigger issue here. By focusing the reader's attention on the oil price assumptions he's distracting us from the actual oil tax revenue assumption. What's often overlooked here is that it's profit from North Sea production that is taxed by HMRC2 - so to get from oil price to North Sea tax revenue you also have to make assumptions about oil production volumes, production costs (hence profitability) and of course effective tax rates. So there are a lot of other assumptions we'd have to understand before we could judge whether the White Paper was in line with "Westminster" assumptions.

Fortunately we don't need to bother ourselves with the detail, we can cut to the chase by comparing the Scottish Government's White Paper revenue forecasts with contemporaneous OBR revenue forecasts. The chart below does just that: it compares the White Paper scenarios published in November 2013 with the OBR forecasts published in March and December 2013 and March 2014 (6 months before the referendum).

There is no ambiguity here: the White Paper was never using "Westminster" assumptions for oil and gas revenues. The White Paper explained its forecasting approach thus:

"we will plan Scotland's public finances and borrowing requirement on the basis of a cautious forecast for oil and gas revenue" - page 305

You don't need the benefit of hindsight to know that those are the words of a false prospectus; the lower of two scenarios they presented was £2bn- 5bn higher than contemporaneous OBR forecasts.

That's not cautious, it's downright reckless3.

Pringle goes on to point out that nobody forecast a price crash as severe as that we've seen. As with all good spin this truthful observation invites an untruthful inference: if everybody was wrong you can't blame the SNP for being wrong. This is of course nonsense: the SNP used assumptions that were far more wrong than the OBR, at the same time as falsely asserting they were using cautious forecasts.

The fact that they presented two scenarios compounds this deceit. Anybody who understands planning knows scenarios are used to test a plan against a range of likely outcomes. Even a layman reading the White Paper would surely assume that the scenarios represent a reasonable range of probable outcomes. The authors were obviously aware of the OBR forecasts, so the only way using these scenarios could have been justified would have been if they'd labelled them "optimistic" and "hopelessly optimistic".

The bottom line here is that the shortfall between reality and the White Paper forecasts is £6.7bn to £7.8bn a year. To put that figure in context: £3bn a year is Scotland's share of the UK's total defence budget; our total Education and Training budget is £7.6bn; £7bn is £1,300 for every man, woman and child in Scotland. Against this figure most other arguments pale into insignificance. Let there be no doubt; if we'd voted Yes the people of Scotland would be facing far worse austerity than we are today. By choosing to continue to pool & share our resources with the rest of the UK, we dodged a bullet.

Mr Pringle and his fellow SNP cheerleaders discourage us from looking back on their false prospectus for one simple reason: if enough people look back and realise how close they came to leading us to economic disaster, they will be the ones getting the bullet come May 2016.

For completeness I've updated the graph to show how the OBR forecasts have progressed since the Referendum; nobody will be surprised to learn that they have continued their record of always turning out to have been optimistic. They were wrong, they were optimistic - but they weren't half as optimistic as the Scottish Government.

For added giggles I thought I'd include what Wings Over Scotland's Wee Blue Book had to say4 about the prospects for oil revenues. As I concluded in Wings and His Wee Blue Book of Errors; he was very very wrong indeed.

********Notes1. The White Paper mentions the OBR 5 times:

page 602: explaining that OBR assumptions for UK onshore receipts have been used as the basis for projecting Scotland's

page 603 (twice): explaining that OBR projections used for reserved social protection spending and onshore GDP

page 604 and 605: explaining that the OBR projection for the total UK deficit is used for comparison purposes (which is of course inconsistent - if you choose to use a higher offshore projection for Scotland you should compare with a total UK figure using that higher projection ... but we'll let that pass).

2. All of HMRC's North Sea revenues are based on taxes aplied to profits. Despite its name, Petroleum Revenue Tax (PRT) is a tax on profits arising from individual wells. There used to be a gross revenue royalty but that was abolished in 2002

3. The White Paper goes on to say"Production in Scottish waters could generate approximately £48 billion in tax revenue between 2012/13 and 2017/18 based on industry estimates of production and an average cash price of approximately 113 dollars per barrel" - page 5104. On page 29 of the Wee Blue Book, having insisted that the UK government has been talking down oil (we now know the reverse was in fact true) he chooses to quote an academic who suggested "an independent Scotland's revenues in 2017-19 would be almost £32bn"

Saturday, 21 November 2015

The often used comparison between Jeremy Corbyn and a geography supply-teacher clearly strikes a chord. In large part of course that's down to his appearance and
manner - the bike, the dress sense, the way he gives the skunk-eye to those unruly
kids on the opposition benches - but it's an image that chimes for a rather more important reason; nobody believes he's here to stay.

In fact in recent weeks I’d suggest he’s been more like a boxer (in attitude, if not in appearance). Not a boxer who's bravely taking the fight to the opposition, more like a boxer who's decided to throw the fight and doesn’t
care how obviously he does it. Cameron barely has to show his pasty knuckles before Jeremy helpfully throws his grizzled chin towards them.

I won't waste time here detailing the series of prat-falls that the Corbyn-led Labour party has taken in this last week. Suffice to say that Corbyn, aided and abetted by loyal allies John McDonnell and Ken Livingstone, has overseen what John McTernan describes as "Labour's worst week ever". If you need convincing of quite how bad the last week has been, of quite how poor Corbyn's political instincts are, I recommend you read that article.

Instead of dwelling on the series of tactical missteps that Corbyn has made, I'd rather use this blog to contemplate the lessons that the Labour Party has to be learning from this painful experience, to ask what characteristics the next leader of the Party will need to possess.

Clearly the overwhelming majority of Labour's voting members believed that Corbyn was the right man for the job. There's no doubt that he's an admirably principled politician and I'm not personally bothered by his dress sense or even his depressingly anti-charismatic manner. What bothers me - what should surely bother anybody who believes that Labour values should be represented in government - is his lack of instinctive leadership skill. If that's a concept that Labour's voting members didn't understand or appreciate before electing Corbyn, it's one they surely must now.

To be clear: I'm not arguing for somebody who has instinctive leadership skills instead of strong principles, I'm arguing that the Party has to rally round someone who has both.

Every week I’ve been asking people for their suggestions of what I could raise with David Cameron at Prime Minister’s Questions - and thousands of people send in their own questions.

Over the summer, the parliamentary party got a decision badly wrong. We abstained on the welfare bill. Would we have made that mistake if we had asked you, our members, what we should have done?

Why not give members the chance to take part in indicative online ballots on policy in between annual conferences - and give our grassroots members and supporters a real say?

We want to see this democratic revolution extend into our party.. opening up decision-making.. to the hundreds of thousands of new members and supporters that have joined us since May.

Some will read those words and think it's great that he's listening and trying to create a more democratic decision making process; I read them and despair. These are the words of a man abdicating his responsibility to lead. I want my Party leader to pin the government down at PMQ's with incisive and politically astute questions, not to read out letters. I want my Party leader to listen to their party and then to lead them - to take bold decisions, to be willing to change members' minds rather than just attempt to read them. A leader's job is to do much more than just divine the opinions of those they lead, their job is to do more than just act as a conduit for the aggregated opinions of those their followers.

This matters not just in terms of how Corbyn leads the Labour Party, it matters because the Party needs people to believe he would be capable of leading the country.

In a representative democracy the people delegate decision making power to politicians; that's how we actually get things done. We appoint our representatives, expect them to ensure they are well informed (in a way that only somebody for whom it's a full-time job could) and place our trust in their judgement. We delegate responsibility to our elected representatives, we don't expect them to swing round and delegate back to us, we expect them to get on with business. Elections are where we pause and pass judgement on whether they have served us well or let us down. I get the impression that were Corbyn PM he would happily run daily referendums rather than take decision making responsibility himself. That approach wouldn't be a triumph of democracy, it would paralyse the function of government.

I'm exaggerating of course, but think about it. Would Steve Jobs have revolutionised the way we use technology if he'd taken a more democratic approach to decision making? Would the Chief Executive of any business be successful if their corporate strategy was determined by polling their employees?

I've never been a fan of Thatcher's political convictions, but she was undoubtedly a politician who got things done. When asked whether she believed in consensus she famously replied: "Yes, but it should be a consensus behind my convictions". I'm pretty sure from Attlee and Churchill through Thatcher and Blair you'd find politicians who got things done shared some of that attitude. It's about having conviction, trusting your instincts and being willing to lead.

Which is where we return to the problem with Jeremy. There's no doubt he has conviction, but there's considerable doubt as to whether he trusts his own political instincts. From "would you press the button" to "shoot to kill", his faltering responses betray the fact that he knows his convictions are out of kilter with majority public opinion. As for willingness to lead - well you just have to read that extract from today's speech to know the answer to that. He doesn't want to take responsibility for difficult decisions; he's throwing the fight.

So if not Corbyn - and it's surely not - who is the person who has both the conviction and instinctive leadership skill required to get the Labour Party back on track? I don't know, but I do know that sensible party members had better work out who it is pretty quickly and rally round them.

Thursday, 12 November 2015

I'm delighted that more and more people who are avowedly committed to the Yes cause - who believe that Scotland should definitely be independent no matter what the economic implications - are starting to actually engage with what those economic implications might be.

As a result there have been two questions raised about the methodology I used in Full Fiscal Autonomy for Dummies (and more generally when comparing Scottish and rest of UK economic statistics). These are good questions, so I think its worth answering them.

1. The use of per capita comparisons instead of %age GDP comparisons

Quoting figures on a per capita basis (or as Alex Salmond used to delight in saying "for every man, woman and child in Scotland") is common practice - people can relate to the idea of their own personal contribution, to their own pay-packet.

Oil tax revenues are notoriously volatile (that's kind of the point) and so Scotland's GDP is itself volatile. If (for example) we look at a time-series of public expenditure as a %age of GDP it is harder to interpret than public spend per capita (e.g. has it gone down as a %age of GDP because it's gone down in total or because GDP has gone up?).

Similarly if we want to disaggregate the contribution of Oil & Gas Tax revenues from other (aka Onshore) Tax revenue, which GDP number do we use as the denominator? We could include Oil & Gas in the GDP in both cases or indeed if we could include it in one but not the other - either way it becomes harder to understand what is causing observed fluctuations.

Finally, the Scottish Government's preferred allocation methodology for nationally shared costs (debt interest, defence expenditure etc.) is on a per capita basis. When the indyref was in full flow there was broad agreement that (were it to happen) debt allocation would take place on a per capita basis. Given that (up until about now) Scottish GDP/Capita has been higher than the UK average for many years, it goes without saying that if you allocated these costs on a GDP share basis Scotland would appear worse off.

So, given my objective was to drill down and explain how the Scottish Economy differed from the rest of the UK, it made sense to use a per capita basis. That the resulting graph (see below) showed such a remarkably stable picture of onshore revenues difference and public expenditure difference per capita kind of proves my point: this is an enlightening way to look at the data.

2. The use of UK or "rest of UK" (rUK) for comparison

I do all of my analysis comparing Scotland to rUK (where rUK is the UK excluding Scotland). As with any good analysis there isn't a right and wrong answer here - it depends what you are using the figures for, how you interpret them.

The Nationalists delight in making the debate about us and them - although "we contribute more than them" is heard rather more often "we get more spent on us" (and even the former won't be heard now oil has all but disappeared as a tax revenue generator). In that context it makes sense that "us" is Scotland and "them" is rUK, If the debate is about how much we pull our weight (the extent to which we give or receive more) within the UK then it makes sense to compare Scotland versus rUK.

If you're asking "what would the difference be for the Scottish population between Scotland standing alone and remaining fully pooled and shared within the UK" then it makes sense to compare Scotland with total UK (with us in it).

If we're looking at Full Fiscal Autonomy (as the blog post I'm referring to does) then we need to understand what it would take for Scotland not to be dilutive to the UK economy (for the rest of the UK not to be subsidising us indirectly through supporting the shared currency). In this case it's appropriate again to look at Scotland vs rUK.

It depends what you are using the analysis for.

One of the more bizarre suggestions is that I chose this methodology to make Scotland look worse - given that it makes Scotland look better in terms of relative tax contribution (and when we're a net contributor) that accusation makes no sense at all.

Conclusion
I hope the merit of the Full Fiscal Autonomy for Dummies blog post is that by sticking to a single definition for comparison purposes (per capita and vs rUK) we can walk all the way through the figures understanding them in a way which is consistent with the language of the debate. It provides a clear and easy to follow explanation.

I stand by my position that for Full Fiscal Autonomy analysis it is correct to use Scotland vs rUK and that it is simpler to understand the figures and the debate in terms of per capita figures. I'm very clear about my definitions and the deficit gap I'm identifying is identified on a per capita basis.

I happen to agree that it's better to define the deficit gap on a %age GDP basis, but it's harder to create a consistent numerical narrative if you do the analysis in that way - for the reasons I explain above. What matters of course is what difference would it make?

This is why I'm so pleased that devoted Nationalists are engaging with this question. If they would rather define the deficit gap on a %age GDP basis then they really should. It would make a big difference if our GDP/capita was hugely different from the rest of the UK, but it's not. That's why some of the more wild-eyed cybernats have to use illustrations pretending we're like mexico versus the USA or that our population might be boosted by zombies who wouldn't impact our GDP or spending (yes, really).

If they want to talk about the "independence difference" rather than the "FFA Challenge" (although I still don't think many of them have understood this subtlety) then they should do the analysis versus UK instead or versus rUK.

I keep challenging them to do this with the real numbers (as opposed to some they've made up)

Recreate the graphs below using %GDP and vs UK

Tell us what the resultant onshore deficit gap is on that basis

I've shown the second graph on a %age GDP basis in my blog - see if you think it makes a difference to the narrative

I can guarantee you they've done this and discovered that

It's hard to get a clear picture on the first graph because of denominator volatility (so in trying to draw that graph they'll understand why I chose the definitions I did)

The resultant onshore deficit gap is a figure they can't (yet) bring themselves to say in public (I'm keen they work this number out for themselves - but they could just look at the IFS analysis and adjust out the oil)

As with my previous blog: I applaud their engagement with the analysis. It's a good thing.

** Addendum **

I have given up waiting for those who challenge the methodology I used to re-run the analysis on a %age GDP and vs Total UK basis so I've done it and decided to post it here. This way people can see why they're so reluctant to do it.

Remember we're looking at the Onshore deficit gap (i.e. the difference between Scottish and UK economies if there was no oil tax revenue) so that we can see what the underlying gap is. This gap has in the past sometimes been filled to over-flowing with oil, but given how bleak the oil outlook is now it would likely need to be filled with tax rises or spending reductions (or - for as long as it would be sustainable - greater borrowing). The view as to how necessary it would be to close this gap varies depending on your perspective: if we were Fully Fiscally Autonomous the rest of the UK would require us to close the gap to avoid the rest of the UK subsidising us by supporting our shared currency (see Eurozone). If we were independent we might choose to simply run a higher deficit and build up yet more debt - but by any measure if we don't close the gap we'd be worse off.

So let's plot the deficit gap over time using the two alternative methods. For the per cap / rUK method this is effectively a plot of the gap between the red and green lines in the graph above.

As I've argued throughout - the methodological difference is very small. Hardly surprising given our onshore GDP/Capita is so similar and we represent under 10% of the UK.

For the record, the 15 year average onshore deficit gap in real terms is:

As you can see the lines actually converge in more recent years: the last 5 year averages are £9.0bn and £8.8bn respectively. I think we can safely say that the Onshore deficit gap is stable at around £8.5 - 9.0bn (I've consistently argued for +/- £0.5bn on these figures anyway).

Let me repeat here for the avoidance of doubt: were we to be independent or fiscally autonomous we would not expect this gap to remain the same. The gap is a function of being in the UK, sharing a tax system (and currency), generating slightly less onshore tax and having a lot more spent on public services (as UK Pooling & Sharing allows).

What this analysis shows us is: to not be worse off than we are now (at least from a net fiscal balance perspective) we'd need to find £8.5 - 9bn from some combination of N Sea revenues, higher tax rates, higher economic growth and/or public spending cuts.

This analysis is simply a guide to scale, it gives us a clear indication of the size of the challenge we'd face, it tells us broadly what we'd need to believe for separation or Fiscal Autonomy to make economic sense.

To help put this £8.5 - 9bn in perspective:

The last time oil was at $99/bbl (in 2014) we generated only £2.6bn of tax revenues - and tax rates and N Sea profitability have declined since then.

The total defence budget allocated to Scotland in the most recent figures was £3.0bn

Our total education and training spend in the most recent figures was £7.6bn

I understand why committed separatists would rather talk about theoretical examples involving Snow White and Zombies (yes really) or why they'd rather play with numbers for Mexico and the USA (don't ask me). But the harsh truth is these number represent the best understanding we have of our economic situation and they expose very clearly what many of us were saying all along: oil was never a bonus, it was the bedrock of the economic case for Independence. Without that oil, there is no economic case for independence.

For absolute Completeness Here's the Fully Audit-Trailed Data Set for vs UK Figures

Saturday, 7 November 2015

As small drops of rainwater eventually erode the toughest granite, so the persistent drip drip drip of economic rationality eventually penetrates the defences of even the most committed reality avoiders. The truth of this observation was illustrated by a remarkable blog post that appeared on Scottish Nationalist fan-site Wings Over Scotland yesterday.

In a conversion of Damascene proportions, Wings now concedes that - even allowing for the inherent weaknesses in the GERS figures - if a case is to be made for an independent Scotland we'll need to find more tax revenues and/or bigger public spending savings than were ever discussed during the independence referendum. It's a tacit admission that his Wee Blue Book was simply wrong when it claimed

"the No campaign desperately want you to believe that Scotland would be poorer as an independent country, and that it would therefore have to raise taxes and/or cut public spending to protect services. But that simply isn’t true. In fact, it’s not even close ..."

*****

For those who may not know, Wings Over Scotland is run by (fake Reverend) Stuart Campbell who, with scant regard for economic accuracy, bangs the drum for the cause of Scottish Independence. The style is that of a shock-jock aiming a blunderbuss loaded with random snippets from Google at a web page and letting rip. It serves a purpose for the Nationalist cause, feeding those so hungry for grievance that they won't question a source that tells them what they want to hear.

Stu doesn't like me very much. I'm very careful with data and persistent when it comes to pointing out some of the more glaring errors he makes (and refuses to correct) - for example I recently posted these 10 factual inaccuracies he's continually promoted through his Wee Blue Book. I probably wouldn't bother correcting him if it wasn't for the fact that he's crowd-funded and makes claims to factual accuracy that don't withstand even the most cursory inspection. I happen to think it's poor form to take money from people and use it to publish material that fails to meet basic standards of accuracy.

I had decided I'd written enough on the subject of Wings - if people are still willing to be taken in by his schtick then so be it. But then he put up a post (authored by someone else) which addresses me and my blog directly. Of course it doesn't even attempt to address the errors that I've highlighted and indulges in the most blatant "playing the man not the ball" ad hominem attack you're likely to see. So far so normal for Wings - nothing worth responding to. But as I scanned through the ranting and grievance seeking rhetoric I realised something quite remarkable was happening; the underlying narrative was changing. Of course there's enough spluttering abuse in there for his slower-witted readers to have their thirst for "unionist bashing" sated - but actually if you filter out the noise he's published a post that agrees with what I've been saying all along. It's a tacit admission that the economic case presented by Yes (and punted by Stu himself) was - to be polite - fatally flawed.

Let's look at the post in question. It's authored by a Lindsay Bruce but is written in the voice of Wings (the author is "we") and reeks of Stu's ad hominem style, so I'll refer to the author as Wings and "he" for simplicity.

Wings doesn't name me directly or link to this blog, and (hilariously) even blurs out my twitter handle and picture. It's almost as if he's scared that if his readers were to be exposed to a rational argument they might start to see through him. Anyway; I'm not so petty so here's his blog post - feel free to read it and return > The Limitations of GERS.

Let me dash though the detail of that post and see if we can decode it.

He refers to me as "amateur Unionist blogger". My blogging is certainly unpaid - I don't rely on crowd-funding to allow myself to do this full-time as Stu does, so I guess he get's the drop on me there: Stu is a "professional Nationalist blogger", I'm the one writing this at 6:30 on a Saturday moring. The flip side of that is course that I'm a professional businessman but we'll let that pass. I'm not a fan of the label "unionist" because, for me, being pro-union is more a result of being economically rational than because I hold a dogmatic view. That said, I've always been clear that I'm intuitively in favour of pooling and sharing between neighbours, so I'll take what he clearly intends as a term of abuse on the chin: I'm an amateur unionist blogger.

I hate myself for being dragged down to his level but if he's trying to trash my reputation I feel I have to respond. I'm an amateur unionist blogger who - as a result of being a moderately successful strategy consultant, businessman and entrepreneur - understands how to handle imperfect data, manage uncertainty and make a business case. I also understand how to present data clearly, reconcile figures and construct a robust analytical audit-trail. Stu on the other hand is someone who wouldn't know how to construct an audit trail if - well - if the electoral commission asked him to provide one to explain his referendum campaign expenditure. He illustrates the reference to me with a photo of the Pet Shop Boys. This is because one of my businesses is www.petplanet.co.uk which (alongside www.greenfingers.com) forms a £20m turnover retail group. We're based in Livingston and employ lots of people; he's based in Bath and doesn't. I have other significant business interests in Scotland but it's irrelevant really - he can call me pet shop boy if it helps him get through the day. Maybe I'm always on his mind?
He parenthetically refers to my "analysis":

In essence, the analysis amounts to dumping all the GERS summary tables into a Microsoft Excel graph, adding the Office of Budget Responsibility (OBR) forecast for oil revenue, and pointing to a resulting £9.1bn gap between Scotland’s public spending and its total revenue.

Oh he's so close to understanding the figures it almost hurts. Let's take this really slowly: the gap between Scotland's public spending and it's total revenue is what is called our deficit. In the most recent GERS figures (2013-14 when oil revenues were still as high as £4bn) that deficit was £12.4bn. What I show is that the amount by which our deficit (excluding oil) exceeds that of the rest of the UK is £9.1bn. The obvious point I'm making is that if you strip out oil (as the market is unfortunately doing for us) that underlying gap is in fact very consistent over the last 15 years. Its the deficit gap which becomes exposed as oil revenues decline.

I lay it out in very careful detail in Full Fiscal Autonomy for Dummies and it is summarised rather neatly (if you read what the axes show) in the graph below. It shows that the deficit gap is explained more by our higher spend per capita (the red line) than our lower onshore tax revenue generated per capita (the green line). I'm genuinely gob-smacked that he still appears unable to follow this really simple analysis.

Now all it took to create this analysis was indeed the simple spreadsheet manipulation of GERS figures and some graphing as he describes. He's right, it really is as simple as that ... which makes it all the more depressing that he still seems unable to follow it.

But in "essence" yes, that was all it took to expose some of the more fantastic Yes camp claims and to highlight the ridiculousness of the economic assertions Stu himself published. Of course if Stu was capable of carrying out such a simple analysis himself maybe he wouldn't have made such a hash of the numbers in his Wee Blue Book - but we'll let that lie.

This, he asserts, is in addition to Scotland’s share of the hefty deficit the UK currently runs.

I do assert that, because it’s true. This is typical of Wings' rhetorical style - he doesn't deny the point I make (he can't, it's true) but by saying "he asserts" his skim-readers will think he's somehow shown I'm wrong. I'm not.

I'm really not sure what I can do about Wings and his acolytes' apparent inability to grasp this amazingly simple fact. Let's do the numbers for him for 2013-14 alone. All figures in £m directly from GERS

Scotland's deficit = (12,434)

Scotland's oil tax revenue then was 3,996

So Scotland's "onshore deficit" (i.e. excluding oil) was (16,430)

Notice that figure is not £9.1bn - the last time our deficit was a low as that was in 2011-12 when oil contributed nearly £10bn. You'd think he'd know that. To understand the deficit gap you need to compare this figure on a per capita basis with the rest of the UK

Scotland's onshore deficit per capita = 16,430/5.342 = £3,076

The onshore defict per capita for the rest of the UK (using same methodology) = £1,451

The onshore deficit gap in 2013-14 was therefore £1,625 for every man woman and child in Scotland

So gross that up by 5.342 million population = £8.7bn deficit gap in 2013-14

My analysis shows in real terms that figure has averaged £9.1bn over the last 15 years and has unsurprisingly been fairly consistent (the gap between the red and green lines)

Anyway: he continues

His conclusion, shouted loudly and often by every angry Unionist on Twitter, is that the government of an independent Scotland – which tellingly they always assume to be an SNP one – would either have to drastically cut public services or raise taxes to fill this “black hole”.

I'll ignore the emotive language and the incorrect assertion that "they" always assume the government will be an SNP one - the essence of this is true: yes I'm saying that an independent Scotland would either have to drastically cut public services or raise taxes to fill this black hole.

But here's the killer line

It’s an interesting piece of analysis. Or it would be, if it wasn’t total nonsense.

It's unfortunate that he's already demonstrated that, despite apparently recognising how simple the analysis is, he's shown he still doesn't understand it. But no matter - let's give him the benefit of the doubt - he may not have followed it but he might still be able to now go on and show why it's total nonsense.

In fact - after some predictable diversionary manoeuvres - we'll see he actually goes on to agree with this conclusion. By the end of this post he's scrambling around for tax increases and cost savings to close the gap - I guess he's hoping his readers will have such short attention spans that they'll have forgotten that he said the need for such actions was "total nonsense".

We have to get past the diversionary manoeuvres first though - I'll try to be brief.

First he suggests the OBR’s oil forecasts are nonsense. As I've pointed out many times the OBR's oil predictions have always been optimistic, but I've also been very clear that if you believe oil will once again deliver £9bn+ pa tax revenue to Scotland then that would indeed change everything. Of course not even Stu is claiming that any more (it would be just mean of me to quote Stu's section on Oil in the Wee Blue Book - suffice to say he was extremely confident that another oil boom was coming). The point here is simple: if you can't make a case for another oil boom then simply saying "OBR bad" doesn't make the obvious issue go away. It's telling that Stu no longer even attempts to argue for a significant upturn in oil revenues.

I've done a fair amount of analysis on this; the key point being that even if the oil price recovers the tax yield from the North Sea is in structural decline. Tax yield is a function of tax rates (already reduced), production volumes (declining) and profitability (declining because of increasing extraction costs as fields mature). Stu doesn't bother with any of this though: his response to an uncertain future is to simply assume it away by dismissing all evidence and analysis.
He then moves on to try and undermine the credibility of GERS:

But it’s GERS that’s the real problem It’s basically the only data source we’ve got in terms of the Scottish Government’s income and expenditure, and that’s why everybody references it.

Remember he's meant to be showing that my analysis is "total nonsense". He starts by accepting GERS is the only data source we've got and that everybody (including the White Paper, the Scottish Government, the SNP and indeed Stu himself) relies on it. I'm struggling to see why the fact that I have used this data source might somehow make my analysis "total nonsense" - if his problem is with GERS then his problem is with all analysis around Scotland's economy and he must think we are operating in a knowledge vacuum. Of course he doesn't believe that, he's just aimlessly letting rip with his blunderbuss again.

He starts with a simple enough statement about GERS

Which gives Scotland slightly (about 10%) more for provisioning public services than a straight population share would.

That's correct - I make it 10.7% in the most recent year. "Slightly" might be pushing it though. The figure works out at £1,326 per person in the most recent year and in real terms on average £1,450 over the last 15 years. Gross that up across our 5.3 million population and you get £7.7bn a year. Scotland's total education budget is £7.6bn - we can probably agree that £7.7bn is a lot more than "slightly more".

Then he indulges in a little distraction about Barnett consequentials. Of course what GERS observes is the Scottish Government's assessment of what’s spent on us after the impact of Barnett. Arguing about Barnett in the context of GERS "being the real problem" is an irrelevant distraction. You can have issues with Barnett if you like, but nobody disputes that GERS shows the result of applying Barnett as it stands. Of course were Barnett to be scrapped or fundamentally changed then that would change what is spent on us and that would be reflected in GERS. So at the risk of labouring the point - the effect of Barnett as currently applied (including treatment of Olympics, Commonwealth Games, Hs2, Heathrow etc.) is already reflected in GERS - it results in us getting that 10% higher spending per capita.

The next distraction is a doozy. We're all dealing with the most up-to-date GERS figures (which restate historical years on a like-for-like basis) but his post now extensively quotes the "renowned economists Jim and Margaret Cuthbert" (no, me neither) from 2005 and 2007! All of those quotes are completely irrelevant as the methodology has been continually changed and improved and historical figures restated since then

In 2008 the Cuthberts themselves said: “This GERS follows a major review, which has been carried out by officials after consulting widely with users of GERS, (including economists and statisticians like ourselves). It is also the first GERS that has been produced with an SNP government in power at Holyrood, though it should be stressed that GERS is produced independently by officials with no input from Ministers [..] For example, the Treasury data, which is the basic source for the expenditure figures in GERS, (and which until recently was a black box to all outside the Treasury), has been vetted thoroughly by statisticians in Scotland, and they have shown themselves willing to override the Treasury’s figures where these are clearly wrong. Specific mistakes have been corrected, including the treatment of Scottish Water, nuclear decommissioning, and the depreciation of public assets, such as roads. [..] In presentational terms, the report is now supported by very much more detail: this not only gives it increased credibility, but also makes it a very much more useful document."

So why include the lengthy quotes dating back to 2005 and 2007? He carries on by quoting the Cuthberts from 2011 (4 years ago is a recent as he gets) – but nothing changes the fact that these are without doubt the best figures available and (after 8 years of SNP ministerial oversight) are if anything likely to favour Scotland's case.

He mentions corporation tax and it's worth an aside. We can all agree that GERS current corporation tax assumptions are necessarily very crude for the simple reason that companies don’t report profit on a Scotland vs rUK basis, so the data simply doesn’t exist. How companies will choose to report profit will depend on a number of factors (not least the tax regimes in place) so of all the GERS assumptions this has to be the least certain estimate. Unsurprisingly the SNP influenced GERS estimate is relatively generous to Scotland, assuming £0.5bn more corporation tax would fall to an independent Scotland than HMRC assume. The net result of the GERS assumptions is that Scotland is allocated corporation tax that implies we generate almost identical corporation tax per capita as the rest of the UK - in fact it shows only a £29 per person difference!
So he's set out to undermine GERS, but in the process he's done nothing more than confirm its the best source we've got, that any historical gripes have been long since addressed and shown us that his favourite "respected economists" are happy that statisticians in Scotland have been willing to override Treasury figures. I'm delighted that he chooses not to repeat the assertions (still on his website) that head-office location somehow determine where VAT is allocated in GERS and I'm relieved that he doesn't suggest (as he's done in the past) that there's any missing Whisky Duty. This is progress and I applaud it.

So now he move on to the crux of the matter: how do we interpret the GERS data?

This really is fundamental. GERS relates only to the current devolution settlement. It says absolutely nothing about the economy of an independent Scotland, or indeed anything about what it might look like if and when the Scotland Bill 2015 is eventually enacted

First of all, it's clearly ridiculous to state that it says "absolutely nothing" about the economy of an independent Scotland. It obviously gives us a starting point from where we can hypothesise what an independent Scotland's economy might look like. I'm sure he doesn't really think we know nothing from the GERS figures - it is after all the GERS figures that are used to justify statements like "Scotland would be the 14th richest country in the world" or "We've paid more tax per head of population every year for the past 34 years" or "Scotland's GDP per head is higher than the UK as a whole". It's the GERS figures that the White Paper was based on for goodness sake.

Remember: he's trying to show that my conclusions are "total nonsense". Let me quote from my own blog on this subject: "I don't mean to understate the alternative choices that we would have under independence. One of the major frustrations of the indyref campaign was that so much bollocks was talked about what our economic starting position really was that we never managed to have a substantive debate about what we might actually do with the power that independence would give us"

So I agree with Stu on on the most important point here: this tells us where we start from if we keep everything as it is today. Of course we wouldn’t want to do that and indeed (given the size of deficit we’d have as a result) we wouldn’t be able to maintain this profile of tax and spend for long even if we wanted to. This analysis merely gives us the base from which we have to explain what we’d change if we were independent, it allows us to ask the right questions and forces on us the discipline of making the rhetoric tie in with actual scaled figures

If we didn’t spend the sums currently allocated to us, what would we actually spend? Would that be more or less and - critically - if less, what difference would that make to people's lives?

If we didn’t have the same tax regime what would we change and what impact would that need to have? If we're going to cut taxes, how will we make up the shortfall? If we're going to tax the wealthy more, who will we tax, how much will we tax them and what will we realistically raise as a result?

If we're going to grow our tax take through economic growth, how will this be delivered? Might we risk losing economic growth as a result of currency uncertainty and separation from our largest market? Even if we're optimistic, realistically how long would it take us to grow our tax base enough to offset the deficit gap and how would we deal with the funding gap in the meantime?

These are all questions that the White Paper (and the Yes campaign more widely, including Wings) famously never answered. Other than suggesting £0.5bn of mainly defence based cost savings and denying any additional costs of independence there was nothing forthcoming on how our independent costs would differ from our allocated GERS costs. Remember: just because some of these costs are under Westminster control, there is no dispute that they are being spent on Scots and (in the case of welfare and pensions) ending up in Scottish pockets. The only other tax ideas in the White Paper were lowering corporation tax and Air Passenger Duty. Put simply: the White Paper simply ignored the £9bn onshore deficit gap, in part by making hopelessly optimistic oil revenue forecasts.

But here's where the narrative changes: give Wings his due, he does now start to front up to the reality of what would be required.

But first he has to attack me personally (again). I'm not getting dragged into his game on this, but suffice to say the Twitter exchanges are completely inaccurately portrayed. For the record here's the economics editor of the Sunday Times ...

Unfortunately Merryn receives a bit of the Wings ad hom treatment for being kind enough to support me publicly. Wings is a bully, that's what he does. Funnily enough I have DM's and emails from prominent economists backing my work but apologising that they don't want to say so publicly because they've seen how Wings attacks people. He's a bully because it works. That depresses me. Still - I have more credible people willing to publicly back me than Wings does, I think that's beyond dispute. If I've missed a credible economist saying they rate Stu's analysis I'm sure I'll be shown it.

Anyway, after taking a few swipes at my shins he then returns to the GERS analysis

Nevertheless, almost all countries run a deficit, and even with all the flaws in GERS it seems beyond much doubt that Scotland would too.

Hold on a minute: "It seems beyond doubt that Scotland would too"? I thought "It says absolutely nothing about the economy of an independent Scotland"? If my analysis is "total nonsense" then so must this "beyond doubt" conclusion be.
But let's focus on the positive: we can agree that it's beyond doubt that an independent Scotland would start off running a deficit. We can I think also agree that he's demonstrated (again) that he hasn't grasped the concept of the deficit gap - what we'd have to close for our economy not to be worse off than we have now by pooling & sharing within the UK. According to GERS the scale of the gap, the amount worse than the rest of the UK that Scotland's deficit would be, is £9bn. Stu has helped us see (via the Cuthberts' work) that GERS is as likely to be generous to Scotland as not (particularly given the corporation tax assumption). He hasn't suggested any better figures and he's tacitly accepted that the GERS figures are now fair. If I was asked to put an error bound on the figures I would suggest +/-£0.5bn would be more than adequate - I don't think even in his wildest fantasy Wings is going to suggest that the figures are out by £9bn. So we have a big deficit gap to address - that too is surely "beyond much doubt".

Then something really important happens. Wings is no longer saying we subsidise the UK and that the simple act of separation would make us better off. He's finally allowed the drip drip drip of persistently, accurately presented data to win him round. He starts to talk about the exceptional tax rises and cost cuts that an independent Scotland might be able to undertake. Remember; when he referred to my conclusion saying this was required he said it was "total nonsense" - now he's starting to list ways it might be achieved. Why bother if it's not necessary?

So what does he suggest? I'll warn you now this is not a very exciting list, but what it does show is a tacit acceptance that some way has to be found to fill the deficit gap that we'd be exposed to

He starts with "close tax loopholes" – every political party manifesto ever written include this idea, because politically it's free money. Quite why an independent Scotland should be able to achieve this when successive Westminster governments have failed is never explained. If this is what you want I'm pretty sure it was writ large in the Labour manifesto - it has nothing to do with independence.

He then talks about "expanding the tax base" - this is what’s otherwise called growing the economy. I’ve covered that in some detail (We Need to Talk About Growth), but at it's simplest we’d require 12% growth over and above the rest of the UK to close the gap through growth alone. The White paper provided an illustration suggesting cumulatively 3.8% superior growth over 30 years might be a realistic "independence dividend". There are plenty of arguments (currency, trade) that suggest we may not experience superior growth - but even at that optimistic rate it would take us over 100 years to close the gap. That's a long time during which we'd have to find other ways to fund our exceptional deficit.

He then bungs in a few “tax the rich” ideas – he doesn't attempt to scale them (because the examples given are pretty marginal) but it’s a positive step, it's an admission that we’d have to tax the wealthy more (not an admission you'll have heard during the indyref and certainly not something you'd have found anywhere in the White Paper). In fact, when you look at the numbers closely, the reality is that to make any dent on the £9bn you'd need to tax the middle classes more - but Stu's not got there yet.

So that's it on tax - now for the cost side (which we know is where the real issues lie).

He starts with defence, without actually suggesting a saving figure. Our total allocated defence spend is £3bn and that puts us pretty much bang on the 2.0% of GDP that NATO members are meant to target. It's not clear how much Stu is suggesting we cut the budget by - there are of course jobs associated with defence, we have fishing waters to protect and if we want to remain in NATO there are commitments we'd have to make. The White Paper suggested £0.5bn was realistic (a figure many have challenged). But I applaud Stu for being bold enough to admit one way we'd be able to close the gap would be to get rid of defence expenditure (and defence jobs). Given our total allocated defence spend is £3bn, it is of course obvious that scrapping all defence expenditure would only close a third of the deficit gap (and I don't think that's what he's suggesting).

He make a quick nod to “fat subsidies” for nuclear - but neglects to specify the annual cost of these to Scotland (it's not big) or to note that over 30% of Scotland's current power generating capacity is nuclear (and I'm pretty sure we wouldn't be a net energy exporter without it).

So he's not really found much. But I applaud the fact that he is tacitly accepting that those arguing the case for independence need to start finding tax increases or cost cuts (relative to our current GERS figures) if they are to explain how our economy would function without the benefits of UK-wide pooling and sharing.

He moves to a close with a typical Nationalist flourish

But the entire point of independence is for Scotland to make its choices for itself, for us to determine our own priorities (and make our own mistakes) rather than having the consequences of somebody else’s foisted upon us.

This is back to the old debate of what is meant by “somebody else” – I see people in Birmingham, Liverpool or London as no more “somebody else” than people in Aberdeen, Glasgow or Shetland. Of course Stu (famously in Bath) clearly thinks differently. People like Stu appear wedded to the belief that Scots are innately superior decision makers and better, more worthy and dependable politicians. The very idea that "our own" priorities could be those of "us" the United Kingdom is anathema to Stu. No amount of economic logic - however compelling or persistently and patiently explained - will ever change that I fear.

Then he finishes with a paragraph which is in fact completely at odds with the content of the peice

To deem that goal an economic fantasy based solely on the flawed and fundamentally irrelevant content of GERS is, therefore, to miss that point in the most spectacularly short-sighted and wrong-headed way possible.

I presume he's suggesting that I have implied that goal is an "economic fantasy". I certainly haven't. All I've done is repeatedly pointed out that you would need to make changes compared to our current "in Union" GERS accounts that would add up to £9bn pa if the act of separation is not to make us worse off. I simply ask - and will keep asking - where will that £9bn come from?

As for the "flawed and fundamentally irrelevant content of GERS" - well that's just a daft statement. He's shown that GERS is the best data we've got and that the specific complaints he lists are outdated. He himself uses GERS data to conclude we'd need to find more tax money or further cost savings (even if he still hasn't understood the difference between a deficit and the deficit gap between us and the rest of the UK).

I see on Twitter that he's been saying that the Wee Blue Book is his "economic case" and that it only mentions GERS once. Firstly it's not an economic case - it doesn't even pretend to attempt to add up to an economic case. I don't think Stu knows what an economic case is. Secondly, it may only mention GERS directly once but almost every figure in the economics section is derived from GERS, even if he's not bothered to work out where the sources (he's normally quoting out of context) get their data from.

Enough: it's a shame Stu hasn't bothered to correct any of the errors in his Wee Blue Book, it's a shame that his attempt to critique my work has been so lacking in understanding. But let's look on the bright side: he's actually not disputed my analysis (insofar as he's managed to understand it) but has instead gone for the "GERS bad" argument - which is just silly - and the "it will all change anyway" argument - which if he bothered to read what I write he'd know I agree with. I just keep asking the question: what will change versus the "in Union" status quo represented by GERS and where will the £9bn (that we'd need to not be worse off) come from?

He's even shown the first signs of starting to think about what would need to change to close that deficit gap. He's a long way from comprehending the scale of the challenge - but he's making progress and for that I can only applaud him.

*** Addendem ****

My attention has been drawn to this quote from "the Cuthberts" in 2012. It seems there's a reason all Wings quotes from them predate that point - because in 2012 they nailed their colours firmly to the mast: economic data for Scotland was "now clear" by reference to GERS (when they could find favourable stats to cherry-pick):

This gets no further than the usual Government Expenditure and Revenues Scotland, (GERS) analysis of the balance of government revenues and expenditures attributed to Scotland. It is now clear, as even the Unionists have to concede, that Scotland’s basic fiscal position, including Scotland’s share of North Sea revenues, is considerably better than the corresponding balance for the whole of the UK. As a percentage of GDP, Scotland has had a healthier balance than the UK as a whole on its current budget for each of the past six years. In fact, for three of these six years, Scotland was in surplus on its current budget, while the UK was in deficit throughout.